Rivanna Investments: Intro to Equity Research

Rivanna Investments First step is to gather information Financial statement and reports (EDGAR) Company website Third party research/ news Factset, Bloomberg, Yahoo! Finance, etc.

Rivanna Investments Intro to Financial Statements Ratio Analysis Financial Statements: Data to Information

Rivanna Investments Income Statement Revenues$10,000 Cost of Goods Sold$(5,000) Operating Expenses (SG&A, R&D)$(1,500) Depreciation & Amortization$(500) Earnings Before Interest and Taxes$3,000 Interest Expense$(1,000) Earnings Before Taxes$2,000 Taxes$(500) Net Income$1,500

Rivanna Investments Balance Sheet Cash A/P5001,000 A/R1000 N/P15001,000 Inventory Other CL3,000 Other CA Total CL5,000 Total CA LT Debt3,0002,000 Net PP&E Equity3,000 Total Assets11,00010,000Total Liab. & Equity 11,00010,000

Rivanna Investments Statement of Cash Flows Summarizes the sources and uses of cash Changes are divided into three major categories –Operating Activity – includes net income and changes in most current accounts –Investment Activity – includes changes in fixed assets –Financing Activity – includes changes in notes payable, long-term debt, and equity accounts as well as dividends

Rivanna Investments Statement of Cash Flows (500) Cash, end of year Net Increase in Cash Cash generated by Financing Acts. Repurchase of Notes Payable 1250 Issuance of Long-Term Debt (250) Dividends Paid 500 Issuance of Common Stock Financing Activity (1500) Cash used in Investing Activities (1500) Purchase of PP&E Investment Activity 3000 Cash Generated by Operating Acts Changes in Current Assets & Liabilities 500 Depreciation 1500 Net Income Operating Activity 1000 Cash, beginning of year

Rivanna Investments Sources and Uses Sources –Cash inflow – occurs when we “sell” something –Decrease in asset account Accounts receivable, inventory, and net fixed assets –Increase in liability or equity account Accounts payable, other current liabilities, and common stock Uses –Cash outflow – occurs when we “buy” something –Increase in asset account Cash and other current assets –Decrease in liability or equity account Notes payable and long-term debt

Rivanna Investments Ratio Analysis Ratios also allow for better comparison through time or between companies Ask what the ratio is trying to measure and why that information is important Ratios are used both internally and externally

Rivanna Investments Liquidity Ratios Current Ratio = current assets/ current liabilities Quick Ratio = (CA – Inventory) / CL Cash Ratio = Cash / CL

Rivanna Investments Solvency Ratios Assets = Liabilities + Equity Debt/Equity Debt/ Assets

Rivanna Investments Coverage Ratios EBIT = Earnings Before Interest and Tax EBITDA = Earnings Before Interest, Tax, Depreciation and Amortization EBIT / Interest EBITDA / Interest

Rivanna Investments Inventory Ratios Inventory Turnover = Cost of Goods Sold / Average Inventory Days’Inventory on Hand = # of days in period / Inventory Turnover

Rivanna Investments Profitability Ratios Profit Margin = Net Income / Sales EBIT(DA) Margin = EBIT(DA)/ Sales Return on Assets (ROA) = Net Income / Assets Return on Equity (ROE) = Net Income / Equity

Rivanna Investments DuPont Analysis ROE = Net Income/ Equity BUT ALSO Profit margin = Net Income/ Sales Asset turnover = Sales/ Assets Leverage = Assets/ Equity

Rivanna Investments Ratio Analysis Ratios are not very helpful by themselves; they need to be compared to something Time Analysis –Used to see how the firm’s performance is changing through time Peer Group Analysis –Compare to similar companies or within industries –SIC and NAICS codes

Rivanna Investments Valuation Measures P/E Ratio = share price/ earnings per share Enterprise Value/ EBITDA Enterprise Value = market cap + net debt Net Debt = debt – cash Market Cap = share price x # of shares Free Cash Flow Yield = FCF/ equity